Big is Beautiful (except for borrowers)

When Itau and Unibanco, two of the largest private-sector banks, announced their merger agreement last November, it became clear that the shock waves caused by the global financial crisis would trigger another round of consolidation in the local banking industry.

The first reaction came from Banco do Brasil, the state-controlled institution that has since acquired several competitors  including Nossa Caixa, a large public bank, in a bid to regain its traditional market leadership.

The result of these shifts is likely to be a strengthened banking sector  a welcome development in the midst of global financial turmoil. But it also comes at a cost: the sector will become even less competitive, a fact which bodes ill for borrowing costs, which are already punitively high.

Certainly, consolidation will damage competition further, says Luis Miguel Santacreu, bank analyst at Austin Ratings, a local financial consultancy in Sao Paulo. The consolidation trend has proved stronger than competition forces. It has clearly not benefited the end customers.

According to William Eid, an academic at the Getulio Vargas Foundation business school in Sao Paulo: As soon as you have a trend towards concentration in the market without strong regulation in this market  which is the case in the Brazilian credit market, where rates are free and floating  the weakest side suffers. Here, the customer is on the weakest side.

Distorted view

Market interest rates in Brazil have long been considered distortive. And the global financial crisis has made things worse for corporate borrowers, as banks adopt a more conservative stance amidst uncertainty, pushing for shorter maturities and pricier practice. Prefixed rates for working capital averaged 36.8% per year in January, or 7.4 percentage points higher year-on-year, including 3.2 percentage points since September, while average loan maturity fell by 21% to 384 days at the beginning of the year, according to official data.

The consolidation trend is hardly new to Brazil. It is not only Itau and Unibanco, or Santander and Banco Real [which was acquired from ABN Amro as part of a global deal with Fortis and RBS], but it is a trend that we have seen in the banking industry since the Real plan (in the mid 1990s), says Eid. If you take a look at the distribution of equity between 1995 and today, you will see a much greater concentration.

The share of the five largest banks has increased from 45% of total assets in 1995 to 75% in 2008 and around 80% at present. Within a few years, Brazil has caught up with Mexico, and is now only behind Peru in terms of market concentration.

It is hard to see any positive impact in terms of cost reduction as a result of these banking mergers, because such gains are rarely transferred to the end customers, says Eid.

As far as small and medium-size companies are concerned, adds Eid, market concentration eventually increases their costs: They are left without alternatives [while larger lenders may be eligible for subsidized loans from the state development bank, BNDES]. From the banks point of view, it is easier to work with three or four competitors than 30 or 40, he says.

Nevertheless, banks have consistently refused to take their share of the blame. Itau Unibanco is coming alive amid times of great changes, challenges and opportunity in the world. We see the banks in Brazil as part of the solution and not part of the problem, says Roberto Setubal, CEO of Itau Unibanco.

As the government launches a public offensive to cut bank spreads, financial institutions have repeatedly blamed the tax burden and the rising trend in payment arrears to defend their interest rate policy. T.O.

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